All Forum Posts by: Nate Garrett

@Jeff Morse 

In my opinion the PM is being sarcastic and unprofessional, and you might be overly concerned about a non-issue.

I'm sure there are archived pages scattered in the Netherlands of the internet of rentals that we used to manage, but no longer do. In the off chance that a prospective tenant inquired about a property that we no longer manage, we would simply tell them we no longer manage the property.

I wouldn't waste any more time with the issue and instead focus on enjoying your new investment property!

Tell the tenant to start charging admission for the mini-zoo.

Collect 10% management fees on mini-zoo.

Additional profit stream. Boom.

@Doug R. 

The best way to grow your property management business? Do a great job at a fair price. @Jeremiah B.  is absolutely right, good PMs are hard to come by and very valuable to investors. Focus on your core business and don't let anything get in the way of that.

As far as marketing, perhaps the best low-cost strategy is to learn as much as you can about Search Engine Optimization (SEO) strategies and manage your own online presence. If you can figure out how to rank highly for Google searches like "property management xxxxx" where xxxxx = your city, you will be off to a good start. Offering quality, valuable content on your website will help you get there. Online reviews (esp Google and Yelp) are important. We have grown by 50% in the last 2 years, a big part of that has been our online strategy. Cost - only your time.

You can request a copy of the county assessor's database. You can use the data contained in the database to find absentee property owners and send them a personalized letter offering your services. Total cost per letter for us is about $1.00 including postage.

Put a wrap on your car. We had an owner with 9 properties walk up to one of our employees in a parking lot. More branding than marketing, but you want your name to be known around town. This cost us about $1500:

Hope that gets you started. There are some great blog articles on owning, operating, and marketing a property management company available at LandlordSource (disclosure: satisfied customer, wrote a blog post for them, no financial relationship).

Best of luck in your business.

Owners commonly ask the question “What’s the highest rent that my property can get?” It seems logical that extracting the highest rental price from your investment property will lead to the most income.

We think the question that you should be asking yourself is:

“What is the highest rental price that will still attract a sizeable pool of prospective tenants while encouraging the eventual tenant to stay multiple years?”

Vacancies are the number one rate of return killer on investment properties. A typical vacancy period costs an investor several thousand dollars in lost rental income, mortgage payments, touch up painting, yard maintenance, utilities, etc.

Your goal should be setting a rental rate that is in line with market rents but encourages the tenant to stay for multiple years in order to minimize vacancies.

Our philosophy is to set the rents ever so slightly below market rents. Why?

Setting rent even $25 per month below market rent is a powerful incentive for tenants to renew leases at the end of the term. We also believe tenants are more inclined to take good care of the property when they feel like they’re being treated fairly. $25 per month is money well spent to avoid a several thousand dollar vacancy.

What about automatic rent increases in the lease?

Many leases include a clause that raises rent by 5% or so if the tenant decides to renew after the initial term. Do you like it when prices go up on a monthly bill for no good reason? Neither do we. We think automatic rent increases in leases are a bad idea. What if local market rents go down? The tenant will shop around at the end of the lease, and when he or she discovers that their rent is about to be $75 / mo higher than other similar properties, they will probably move.

Our philosophy is to raise rents only when there is a good reason to do so: when market rents in the area have increased significantly. If you do decide to raise the rents on an existing tenant, only raise it enough to bring it near current market rent and have comparable rental data available to show the tenant that you are treating them fairly.

Like any other business, provide value for your customer (tenants) and your business will prosper. Your pocketbook will thank you in the long run.

@J Scott 

@David Krulac 

Great discussion points. There are a ton of variables involved. The only definitive method of determining which is higher would be to conduct a similar survey of single family investment owners or property managers. I will ask NARPM if they're interested in doing such a survey.

My data is based on sampling multiple properties with rents ranging from $700 - $1500 / mo within our ~200 property management portfolio. The conclusion that I have drawn is that the 50% rule is a good rough estimate for third-party managed and maintained single family in Tulsa, OK.

My first post was intended merely to add another data point to answer the question posed by the OP.

The 50% rule, or any other rule of thumb for that matter, is only useful for general discussion and should never be used as a substitute for thorough due diligence on an individual property.

@David Krulac  

Am I correct in interpreting your statements to mean you believe single family has lower operating expense ratios than multifamily for comparable assets?

What is your average single family operating expense ratio for your entire portfolio over multiple years?

Do you do your own property management and leasing?

Do you do any maintenance work yourself? How much do your tenants perform?

@David Krulac 

Happy Thanksgiving!

I posted the apartment data as a benchmark. Because an apartment complex contains many units in the same location and affords the owner economies of scale, it follows that single family will have higher operating expense ratios. Walmart will always have better economies than the ma and pa corner store.

Your expenses are lower because you are having tenants handle maintenance issues. Are you also doing your own management and leasing?

To make it clear again, 50% is a good ballpark figure for singe family average operating expenses as a percentage of gross potnetial rent, assuming the property is managed and maintained by a third party.

The more management and maintenance that you do not pay a third party to take care of, the lower your operating expense ratio will be.

Here is a graph, courtesy of the Federal Reserve Economic Data website, that shows median sales prices of existing homes vs. CPI of rent for the last 10 years. You will notice that rents continued to rise during the 2007-2009 downturn.

Notice that rents declined slightly at the end of the recession in 2009 (shaded area). So it would appear that rental rates are correlated most closely with incomes. The effects on rental prices of the decrease in incomes were not felt until a few years after the recession started (lagging).

There was no corresponding decrease in rents during the massive decrease in housing prices in 2008-2009, so it appears rental prices do not appear to be closely correlated with the sales prices of existing homes.

Click here for interactive graph

Here is a graph of median incomes vs. rents demonstrating rents are more closely correlated with income than housing prices.

Click here for interactive version

If you haven't checked out the FRED website and you enjoy looking at historical housing data, I would highly recommend it. You can build your own graphs using thousands of available economic indicators.

The National Apartment Association publishes a survey of operating income and expenses every year.

Operating expenses for multifamily properties averaged between 40 and 55% of gross potential rents for 2013.

Important to note is that operating expenses, as defined by these studies, do not include vacancy loss, or capital expenditures. Vacancy was an additional ~6% and capital expenditures ~7% of gross potential rents.

If we assume that operating a portfolio of single family rentals is less efficient than operating a multifamily property, 50% is a good rule of thumb for operating expenses as a percentage of gross potential rents for single family, assuming that the property is managed by a third party and outside vendors perform all maintenance. If you manage the property yourself and do most repair work yourself, your operating expense ratio will be lower, perhaps significantly lower - maybe 15-20% lower depending on how much work you do yourself.

In managing close to 200 properties, we have found the 50% rule to be a very good rule of thumb for third-party managed and maintained single family.

The 50% does not include a new roof or HVAC system. Those are capital expenditures, not operating expenses, and should be depreciated, not expensed.

@Jessica Cooper 

I realize that after a situation like this occurs it is natural to look for someone to blame. But there are times that despite the property manager's best efforts, a tenant will turn out to be a different person than how they appeared on the application.

It is also a fact of owning rental property that sooner or later you will get a bad tenant. I've had just a few, but they can really stick it to you.

As to whether or not the PM company did its job, you will have to do some more digging. Did the tenant have a criminal or eviction history on their background check? If there weren't clear signs of drug use by the tenant on their background check, how could the PM company have known that the tenant was a drug user during the screening process?

Sorry to hear about the situation. I hope you get the property repaired quickly and find a good long term tenant next time.